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Working Papers
- Accountability with Strong Parties
Joint with Gerard Padro i Miquel
We examine the accountability of politicians to their parties when parties are able to discipline incumbents by dismissing them at no cost. The fundamental tension can be summarized as follows: while parties want politicians who will implement the party's agenda, they also need politicians who can win elections. Therefore parties might not be prepared to dismiss a politician that is charismatic, even if he deviates from the party line. We characterize politician and party behavior as the politicians' ability to win elections (personal valence) and the value of winning the election to the party (polarization) vary. We uncover two major reasons parties fail to hold politicians accountable. First, if an incumbent is popular with voters, he is too electorally valuable to the party. Consequently, he cannot be replaced and hence will be able to implement his own agenda. Second, if an incumbent is unpopular with voters the party cannot commit to retain him even if he toes the party line perfectly, so he will follow his own agenda with the little time he has remaining. These behaviors are labelled impunity and damnation respectively, and are explored in case studies from American and comparative politics.
- The 2008 Presidential Primaries through the Lens of Prediction Markets (New Version!)
Joint with Neil Malhotra
To explore the influence of primary and caucus results during the 2008 nomination process we leverage a previously unused methodology---the analysis of prediction market contracts. The unique structure of prediction markets allows us to address two questions. First, we analyze whether primary and caucus results affect candidates' chances in the general election, as candidates who take extreme positions during the nomination contest may be unable to easily appeal to centrist voters in the general election. We also assess whether states with early primaries, such as Iowa and New Hampshire, have a disproportionate effect on the nominating process. We show that the length of the primary process has a minimal impact of the electability of candidates in the general election, and that some states have a disproportionate impact on the nominating process. However, the states that have the largest impact are not necessarily New Hampshire and Iowa, the two that have often been assumed to be the most influential because of their early position on the primary calendar.
- How Prediction Markets can Save Event Studies
Joint with Justin Wolfers and Eric Zitzewitz
Event studies have been used to address a variety of political questions---from the economic effects of party control of government to the importance of complex rules in congressional committees. However, the results of event studies are notoriously sensitive to both choices made by researchers and external events. Specifically, event studies will generally produce different results depending on three interrelated things: which event window is chosen, the prior probability assigned to an event at the beginning of the event window, and the presence or absence of other events during the event window. In this paper we show how each of these may bias the results of event studies, and how prediction markets can mitigate these biases.
- Sociotropic Voting and the Media
Joint with Stephen Ansolabehere and March Meredith
The literature on economic voting does describe how voters acquire information about the general state of the economy, and how that information is used to form perceptions. In order to begin understanding this process, we asked a series of questions on the 2006 ANES Pilot about respondents' perceptions of the average price of gas and the unemployment rate in their home state. We find that questions about gas prices and unemployment show differences in the sources of information about these two economic variables. Information about unemployment rates come from media sources, and are systematically biased by partisan factors. Information about gas prices, in contrast, comes only from everyday experiences. While information about both indicators show effects from demographics, only unemployment rates affect a respondent's political outlook. Moreover, perceptions of unemployment rates can be used to isolate the effect of economics on partisan preferences.
- Carrots and Sticks: Punishment and Party Power in Congress
This paper proposes a dual-utility theory of parties in a legislature. In this theory a legislator has preferences over both actions and policy outcomes. Specifically, a legislator's utility is determined by position taking---his own votes---and by partisan utility which depends on policy implemented by the legislature. Party leaders design mechanisms that make legislators better off by co-ordinating votes and compensating those legislators that vote against the interests of their constitutents. The model produces two main findings. First, party leaders are more likely to use promises of rewards and threats of punishment as the size of the party or the benefit of passing the party's policy platform increases. Secondly, and perhaps counter-intuitively, party leaders become less likely to use rewards and punishments when the number of centrist legislators increases, or the costs to centrist legislators increase.
- Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? (New Version!)
Joint with Justin Wolfers
The favorite-longshot bias presents a challenge for theories of decision making under uncertainty. This longstanding empirical regularity is that betting odds provide biased estimates of the probability of a horse winning--longshots are overbet, while favorites are underbet. Neoclassical explanations focus on rational gamblers who overbet long-shots due to risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel empirical tests that can discriminate between these competing theories by focusing on the pricing of compound bets. We test whether the models that explain gamblers' choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including compound bets in the exacta, quinella or trifecta pools. Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory. Along the way we provide more robust evidence on the favorite-longshot bias, falsifying the conventional wisdom that the bias is large enough to yield profit opportunities (it isn't) and that it becomes more severe in the last race (it doesn't).
Press Reactions:
Published or Forthcoming
- Even if it's not Bribery: The Case for Campaign Finance Reform (New Version!)
Joint with Brendan Daley
Forthcoming, Journal of Law, Economics and Organization, 27(1).
Earlier version available as SIEPR Discussion Paper 06-027
We develop a dynamic multi-dimensional signaling model of campaign finance in which candidates can signal their ability by enacting policy and/or by raising and spending campaign funds, both of which are costly. Our model departs from the existing literature in that candidates do not need to exchange policy influence for campaign contributions, rather, they must decide how to allocate their efforts between policymaking and fundraising. If high-ability candidates are better policymakers and better fundraisers then they will raise and spend campaign funds even if voters care only about legislation. Campaign finance reform alleviates this phenomenon and improves voter welfare at the expense of politicians. Thus, we expect successful politicians to oppose true campaign finance reform. We also show our model is consistent with findings in the empirical and theoretical campaign finance literature.
- The Promise of Prediction Markets
Joint with 21 coauthors
Science, 320(5878) 877-878.
The ability of groups of people to make predictions is a potent research tool that should be freed of unnecessary government restrictions.
- Party Influence in Congress and the Economy
Joint with Justin Wolfers and Eric Zitzewitz
Quarterly Journal of Political Science, 2(3): 277-286.
Also available as NBER Working Paper #12751
To understand the extent to which partisan majorities in Congress influence economic policy, we compare financial market responses in recent midterm elections to Presidential elections. We use prediction markets that track election outcomes as a means of precisely timing and calibrating the arrival of news, allowing substantially more precise estimates than a traditional event study methodology. We find that equity values, oil prices, and Treasury yields are slightly higher with Republican majorities in Congress, and that a switch in the majority party in a chamber of Congress has an impact that is only 10-30 percent of that of the Presidency. We also find evidence inconsistent with the popular view that divided government is better for equities, finding instead that equity valuations increase monotonically, albeit slightly, with the degree of Republican control.
Press Reactions:
- Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections
Joint with Justin Wolfers and Eric Zitzewitz
Quarterly Journal of Economics, May 2007, 122(2) 807-829.
Also available as NBER Working Paper #12073
Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2‑3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.
Press Reactions:
- Television and the Incumbency Advantage in U.S. Elections
Joint with Stephen Ansolabehere and James M. Snyder
Legislative Studies Quarterly, 31(4): 469-490. (Statistical Appendix)
We use the structure of media markets within states and across state boundaries to study the relationship between television and electoral competition. In particular, we compare incumbent vote margins in media markets where content originates in the same state as media consumers versus vote margins where content originates out-of-state. This contrast provides a clear test of whether or not television coverage correlates with the incumbency advantage. We study U.S. Senate and state gubernatorial races from the 1950s through the 1990s and find that the effect of TV is small, directionally indeterminate, and statistically insignificant.
- Unrepresentative Information: The Case of Newspaper Reporting on Campaign Finance
Joint with Stephen Ansolabehere and James M. Snyder
Public Opinion Quarterly,69(2): 213-231.
This paper examines evidence of sampling or statistical bias in newspaper reporting on campaign finance. We compile all stories from the five largest circulation newspapers in the United States that mention a dollar amount for campaign expenditures, contributions, or receipts from 1996 to 2000. We compare these figures to those recorded by the Federal Election Commission (FEC). The average figures reported in newspapers exceed the analogous figures from the FEC by as much as eight fold. Press reports also focus excessively on corporate contributions and soft money, rather than on the more common types of donors---individual---and types of contributions---hard money. We further find that these biases are reflected in public perceptions of money in elections. Survey respondents overstate the amount of money raised and the share from different groups by roughly the amount found in newspapers, and better educated people (those most likely to read newspapers) showed the greatest discrepancy between their beliefs and the facts.
Book Chapters
- Examining Explanations of a Market Anomaly: Preferences or Perceptions?
Joint with Justin Wolfers
Forthcoming in Handbooks in Finance, William Ziemba and Donald Hausch, Editors
This paper compiles and summarizes the theoretical literature on the favorite-longshot bias, an anomaly has been found in sports betting markets for over half a century. Explanations of this anomaly can be broken down into two broad categories, those involving preferences and those involving perceptions. We propose a novel test of these two classes of model that allows us to discriminate between them without parametric assumptions. We execute these tests on a new dataset, which is an order of magnitude larger than any used in previous studies, and conclude that the perceptions model, in which bettors over-estimate the chances of small probability events, provides a better fit to the data.
- Prediction Markets: From Politics to Business (and Back)
Joint with Justin Wolfers and Eric Zitzewitz
Forthcoming in Handbooks in Finance, William Ziemba and Donald Hausch, Editors
Prediction markets are the subject of a growing body of scholarly literature, and growing attention from the business community. These recent trends are often discussed without reference to the long history of these markets. Prediction markets started as simple wagers on political contests and have expanded through laboratory and field experiments. We survey this history, detailing the past and current uses of prediction markets. We conclude by examining some potential challenges that will need to be addressed as the uses of prediction markets expand.
- Information (In)Efficiency in Prediction Markets
Joint with Justin Wolfers and Eric Zitzewitz
In Information Efficiency in Betting Markets, Leighton Vaughn Williams, Editor. Cambridge University Press, 2005.
We analyze the extent to which simple markets can be used to aggregate dispersed information into efficient forecasts of unknown future events. From the examination of case studies in a variety of financial settings we enumerate and suggest solutions to various pitfalls of these simple markets. Despite the potential problems, we show that market-generated forecasts are typically fairly accurate in a variety of prediction contexts, and that they outperform most moderately sophisticated benchmarks. We also show how conditional contracts can be used to discover the markets belief about correlations between events, and how with further assumptions these correlations can be used to make decisions.
Co-author Webpages
Stephen Ansolabehere
Brendan Daley
Neil Malhotra
Marc Meredith
Gerard Padro-I-Miquel
James M. Snyder, Jr.
Romain Wacziarg
Justin Wolfers
Eric Zitzewitz
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